In conducting mass appraisal, the appraisers are generally guided by three basic approaches for analyzing the value of properties. They are:
- The Cost Approach
- The Market (Sales Comparison) Approach
- The Income Approach
The Cost Approach, which is the best suited of the three approaches for the valuation of real property in the "mass appraisal" process, serves as the primary valuation method in New Hanover County. The Cost Approach, estimates the replacement cost new of the property, or the cost to build a structure of equivalent utility (functionality). The estimates are based from costing manuals and local contractors. From that, an estimate of total accrued depreciation (physical, functional, external) is observed, calculated and deducted from the cost estimate to generate the depreciated replacement cost new. To that, land valued separately is then added to get an estimate of the fair market value of the property.
The Market approach to value compares the property being appraised with similar properties sold in the past.
The Income Approach is the process of estimating the value of an income-producing property through capitalization of the annual net income expected to be produced by the property.
The Market and Income Approaches each analyze the value of the whole property. In order to derive a building value estimate from either of these indications of value, the value of the land must be subtracted from the total value. Should the Market or Income Approach, or both, thus indicate a very low contribution for the buildings, the land may be mis-improved (the buildings will no longer represent the highest and best use of the land). The appraiser may be required to apply an appropriate significant amount of Functional or Economic Obsolescence.
If two or three of the approaches indicate significantly different values, the appraiser who reviews the components of each approach usually finds additional factors that must be considered. Not all properties are a candidate for the application of all three approaches.
The Tax Administrator's Office is required to divide every parcel's appraised value into its components (land and building). However, the somewhat artificial allocation of a given parcel's total value (final market value) into its land and building components must not be compared to a similar allocation of total value in any other appraisal opinion. Any such comparison is invalid.
Should an owner elect to appeal a value, only the total value is in question - not its components.